Thrifty 30: February review

Fri, 4th February 2011 - 17:17

Mwah Glancing through this list of 40 tips for investors, it occurred to me the author, who I respect greatly, had left off the most important tip. Keep it simple. It’s not surprising simplicity is on my mind, after I hideously over-complicated my RM analysis. The torment of having to consider removing a company from the Thrifty 30 that I had previously favoured, and thought I understood, had sent my mind into a fug. There are all sorts of reasons you can conjure to justify buying, or holding a share, and my own exercise in ‘magical thinking’ was a reminder that in managing the portfolio I should always be striving to maximise the value, and strength of the companies in it. That’s it. Fortunately, I’m not expecting to reappraise any members of the portfolio this month. Having devoted January to reading the annual reports of all the companies that published late last year, I’m up to date. New prospects are also a little hard to find, as most companies report their full year results in the spring, and the annual reports follow up to four months later. I’ve updated my screens, shortlists of possible candidates, in the usual place, but in keeping with my rediscovered love of simplicity I’m tinkering with another screen, an attempt to give me a single list of shares to research, with the best candidate at the top. Here it is: Selected companies EY% ROTA Eq:Ass F_Score 10yPE World Careers Network WOR 19 12 76 5 17 Astrazeneca AZN 18 21 41 6 14 WH Smith SMWH 14 18 36 7 14 Electronic Data Processing EDP 14 5 59 6 23 Redhall RHL 13 6 53 5 24 Associated British Foods ABF 9 9 52 9 21 Clinton Cards CC. 15 10 27 6 4 Servoca SVCA 10 10 41 5 1 Euromoney Institutional Investor ERM 8 15 31 8 21 Holidaybreak HBR 11 9 25 6 9 To produce this list using Sharelockholmes, I took all the companies that have been listed on the stock market ten years or more and removed companies:

Reporting full year results more than four months ago

Already in the Thrifty 30 portfolio

I have previously rejected (unless I want to take a second look at them)

Appearing to be in financial distress (with F_Scores of less than 5)

Looking outrageously expensive (with a 10 year PE greater than 25)

For the remaining 43 companies I isolated value, profitability, and financial strength in three separate statistics. The earnings yield, Joel Greenblatt’s Magic Formula measure for value, divides profit (earnings before interest and tax) by the value of the whole enterprise (enterprise value, its market capitalisation plus net debt). The higher the yield, the cheaper the share. The earnings yield should give better results than the traditional PE because it puts all companies on an equal footing. For example, it values them as if all their debt has been repaid by investors (by including the cost of ‘repaying’ the debt in the price of the share and not charging interest against the company’s earnings). Similarly, I used average total assets for the year to measure the capital the company used to make a profit, and divided it into earnings before interest and tax to measure profitability. Again, this puts companies on an equal footing by counting all capital, whether it’s funded by equity or debt. Since leverage is dangerous, as we discovered in the credit crunch, and because the Thrifty 30 tries to put safety first, the third variable (Equity:Assets) is designed to exclude highly indebted companies. The higher the ratio of equity to assets the better. Finally, I ranked the list using these three variables (equally weighted), so the cheapest, most profitable, and financially strongest companies appear at the top. The table above, shows my top 10 targets. The last, Holidaybreak, was eighteenth in the original list of 43, before I removed the companies I’m unlikely to be interested in. These companies won’t be high-flyers, I’ve chosen conservative statistics and employed them conservatively. But they’re suitable, I think, for a portfolio that puts safety first. I can’t be sure how many I’ll investigate this month. Sharelockholmes has a rudimentary back testing capability, and I want to see how well my über screen would have worked in the past. Will this list make my life simpler? Maybe, a bit. It prioritises my workload. But I think I will still glance at my venerable shortlists once a month, especially the Ultimate Bargain shortlist and the Thrifty Thirty shortlist. They target more troubled, less well adjusted companies, and there is money to be made in them. Leeds Group, a perennial bargain, and magazine and events company Future, are also, therefore, potential candidates. - Thrifty 30 updatesThe Thrifty 30 portfolio (updated 1 Feb) Greenish building products company Alumasc’s headline half-year results are encouraging, lots of figs are *up*. Car stereo and entertainment system manufacturer Armour announces a £2m placing @ 7p days after I add more shares to the Thrifty 30 @8.45p. For a brief discussion of the implications see these comments. French Connection issues a positive trading statement.

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